The 8 Reasons Why Using Property Management Is a Waste of Time

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This post is likely to rankle a few feathers, especially for the property managers out there. But first a disclaimer; I have 24 rentals that I manage and maintain myself.

I manage and maintain a property for another person, and I have a real estate license. I even have a full-time job.  I have used a big name property manager in the past, with 100% of tenants provided by them that did not make it a year.

So I know a bit about property management and property management companies. I know many other owners that have had similar trouble with property management firms.

Here Are 8 Reasons Why Using Property Management is A Bad Idea

If you are making over $200K per year in your real estate investing, you can skip this article; you do not have time to read it.  You can make more by doing, not reading. If you are only making ~$150K per year, like myself, continue reading.

 1. Sacrificing Your Cash Flow

When you hire a property manager (PM), expect to pay about 8 to 10 percent of your rents to the PM.

Related: How to Be a Terrible Cash Flow Investor (7 Guidelines for Ultimate Failure!)

In reality, that doesn’t seem like much, but you are actually giving up a significant part of your cash flow. At a $1,000 a month rental, that’s a $100 fee.  If you invested $20,000 in a property that you expected to get a 10% cash-on-cash return, you will get back approximately $2,000 annually, after the PM fees.

Skip the property manager, and your return would be $3,200.  That’s a whopping 60% higher!  In addition to the monthly fees, paying a month’s worth of rent to actually place a tenant blows the numbers out even further.

2. You Have a Higher Motivation

Secondly, many PMs are failed realtors or property investors.

They could not make it in the residential sales, or investment game, so they became a PM.  They have never managed an investment property of their own, yet they seem to think they know how to manage yours.

Even if they have worked for a PM firm, they have not felt the pain of a bad tenant and had to open their own checkbook to pay for it.  Their motivation is to make the commission, not make you money.

Thirdly, a PM doesn’t have to be close to the property.  They just have to make calls.  In one PM contract I read, they only guarantee four hours per year of on-site time to handle the property.

Everything else is additional at $75 per hour.  I think $1,200 for working four hours a year is pretty good wages.  Where do I sign up?

3. Making Money at Every Turn

Property managers make money when they fill a rental.

They make money when they do maintenance, as a markup. They make money when they have to do an eviction (for their bad tenant). They make money when they turn a rental for a new tenant. They make money when they place a new tenant.

The more a PM churns a unit, the more they make.  Like a stock broker. You make more money with a buy and hold strategy, keeping a tenant as long as possible. The only way to make sure you make the most money is to make sure you take charge of the property management decisions.  No one is more concerned about your profit than you!

 4. The Property Management Guarantee

When a PM brings in a tenant, they usually guarantee the tenant.

But the PMs guarantee isn’t a refund like you get at Walmart; the PM just gets you a new tenant, an exchange.  Sort of like the weatherman getting a weather forecast wrong.  They just do another forecast.

That new forecast is likely wrong too.  The PM doesn’t guarantee the rent.  They do not pay out of their own pocket to bring your rental back to the condition it was in before they brought in the subpar tenant.  They do not refund your eviction cost, or your lost rent.

In my own rentals when I was first starting, I had a PM bring in two sets of tenants. One tenant got laid off and wanted to move out of state after nine months. The other I had to evict, at my expense.

My replacement tenant lasted about 8 months, where the tenant had to move due to her kid being picked on at school. These situations could have happened to anyone, but they have not happened to me since I started doing my own property management.  And I have four times as many units than I had back then.

5. Live Close to Your Property

I am a firm believer in a rental property should be close enough to walk to.

That is a bit of an exaggeration, but if you are over an hour’s drive from your rental, you probably need someone to do some of your work for you. That work costs money, and your investment return will be less.

Related: Grow Your Real Estate Network; Get Involved Locally

If you take the attitude that you can increase your return by as much as 60%, just by looking closer to home, you can look for opportunities that may bring in more profit; even though the cap rate might be less.  Looking closer to home mitigates many of the unknowns about property investing.

You do not have to live close by your property, but you may be able to exponentially increase your profitability if you do.  You know your neighborhood, use it to your advantage.

6. Buy Two (or three) Hats

When you are a property investor, you need to determine your strengths.

Often, you can be good at multiple things, and increase your revenue.  Similar to the way companies either buy other companies, or do their own work in-house to save money, you can too.

 First, you are an owner or investor.  If you are an LLC or Corp, you already are doing some of the work in-house.  As president, you make the decision to buy a property.  You go back to the shareholders to get the capital to buy it.  Often, the president and shareholder are one in the same.

Once you buy a property, you need a property manager.  You can hire it out to an outside firm, and give away up to 50%+ of your cash flow, or you can manage it in-house.  Create your own PM Company, sort of a subsidiary to your investment business.  You can do this even if you only manage one property – your own.  You do not need a separate legal entity, just the mentality that you actually have one.

When you are in the PM role, take off the owner hat, and put on a PM hat.  Skip the owner emotions when you are making PM decisions, but know that when a tenant damages a property, you pay, not the owner.  You will make a better decision.  It would be nice if all PMs could be held accountable that way.

7. Maintenance Man to the Rescue

When you have the skills and tools to do some maintenance, you can do a similar hat switch.

In the real world, a tenant will call the PM and describe a problem.  The PM will call a maintenance guy.  The maintenance guy will fix the issue 90% of the time.

If it is a larger issue, they will let the PM know, so the PM can get an authorization from you to fix it.  And you have no choice but to authorize, you are generally at their mercy.  What are you going to do, say no to a new furnace and have an un-inhabitable place?

So, you have your own PM Company and your own maintenance department, which may consist of a single part time worker (you).  You answer the call directly from the tenant.

You might troubleshoot it over the phone.  Maybe the tenant sends pictures via a text message or email, after all this is 2014 not 1980.   You can determine the skills it would take, i.e. plumber, electrician, HVAC, handyman, painter, cleaner, carper cleaner, handyman, etc.

You can call a maintenance guy to head over and fix the issue, or troubleshoot it further.  If you have the tools, skills and time, you can do the fix yourself.

Odds are, no matter how busy you are, you have enough time to stop and make $100 per hour.  You schedule a fix when you have some time, and get it done.  An emergency might require a faster action, and subcontracting out the work if you do not have the skills or time.  If you fix things at home, you can fix it in a rental.

In the 25 rentals I manage, I average I suppose one or two calls per week, maximum.  Many weeks I do not get calls.  That’s 50 to 100 per year.

It works out to a maximum of two or three calls per year, per unit.  Many are just questions, no on-site visit required.  There might be one or two calls per month that need maintenance.  That’s about a half a call per year, per unit, for maintenance.  Some units call more often, some never call.  I am hardly ever called at night, I cannot think of a call in the past year that was after hours.

8. Simplifying Property Management

So, you can be a PM, and be anywhere in the world, as long as you have internet or phone access.

You need a phone, and a rolodex, or Google.  Most people use Google (or Bing) now, it’s 2014.  A short list of contractors helps, but there are 1,000s of companies that do all of the work that might be required, if you cannot be there to do it yourself.

Save money, increase your profitability, and be more self-sufficient by taking on more roles.

Have any of you regretted using a property management company?

Be sure you leave your comments below!

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About Author

Eric is a 54 year old, soon to be former, computer professional. He started several years ago to replace his “work income”, with other alternate streams. He is well on his way to retirement at age 56, and is currently making more money at extracurricular activities, than he is working at his full time job. Whether that is Financially Independent, or just old fashioned entrepreneurial spirit, is in the eyes of the beholder.

70 Comments

  1. Eric, I could not agree more, property managers are a total waste of money. My older brother has his CCIM (I think he initials are right) He told me unless you have at least 30 units most managers look at the job as a money loser. When I look at a job as a money loser I am not interested as I am sure they are not also.

    • Thank you for the comment!

      Exactly. It’s not hard at all to manage tenants, when you know how to screen tenants. I consider myself to one of the best screeners out there. I probably reject some tenants that might be good, but I have as easier time as a property manager.

  2. Eric,

    Looking forward to reading some of the comments…

    I also manage my units. It keeps me grounded, it entertains me, it helps my cashflow and I know what’s going on in my businesses. You don’t want to be the business owner that wakes up and doesn’t know where all the product and people have gone.

    Frank

    • Thank you for the comment! I am looking forward to the comments too!

      Your thoughts are like mine. If I was traveling, and out of touch, it might be different. If you just want to be a passive investor, but a REIT. Understanding your business is key to running it.

  3. I manage my own properties which totals 13 units. I tend to buy properties in need of repair and I always have a list of what can or should be done next at a property. These might be new entry a steps or deck, painting up a certain area, siding, landscaping, different mechanical upgrades. These things take up the bulk of the time. I don’t have much for maintenance issues and when I do they are pretty small and easy to fix. I have one property that has hard water that I have had to replace a couple sections of water line as the fittings have leaked. Tightening up plumbing drains or snaking the occasional line. I would lose a lot of money to have a property manager take 10% a month and then hire out this simple repairs. Many times things are just so simple. I once had a tenant call to say the furnace didn’t work. Well it waz spring and after a warm spat another tenant turned the thermostat off and the other tenant didn’t see that so she thought it was broken. 2 minute fix shereas a property manager might have called a tech for $100+. A lot of upside from my perspective but then again I am handy which helps a lot.

    • Thank you for the comment!

      I do all of my own maintenance too. I remove walls, install kitchen cabinets and counter tops, install washer and dryer hookups, replace doors, install laminate or time floors, replace shower valves, toilets, faucets, etc.

      Your furnace story reminds me of a time I got a call to fix a furnace. The tenants had stored a roller mop, the ones with the wringer handle near the top, in the furnace room. The handle had hit the ‘light switch’ that controlled the furnace and shut the furnace down. I moved the mop, flipped on the switch, and all was well.

      That saved me $100+ too, just like yours.

  4. Hi Eric,

    Great article. Curious, why you chose a $200k+/yeare income cut-off for using a PM, versus less than that to not use one? Some sort of economies of scale or diminishing marginal returns at work here? Please explain. Thanks.

    • Thank you for the comment!

      No reason for the $200K really… There are a lot of folks that seem to think outsourcing all of their work saves time to work on ‘getting deals’. Unfortunately, many of these ‘deal seekers’ do not make much more than the minimum wage when you factor in all of their time. Why not go for the sure $100+ per hour, and do the basic items in your rental property yourself. Like managing a property that is only a few miles away.

      Odds are, most people who are too busy ‘making deals’ are making less than the people/companies they are hiring to do their work for them.

      If you are so busy you cannot do simple tasks, then I hope that you are also hiring out mowing the grass at your own home, changing your own oil, and getting a housekeeper to clean. You do not have time to do those chores either. Nor do you have time to go on vacation…

      When you get down to it, you need to make a considerable amount more to accomplish the same lifestyle, if you are outsourcing all of your work.

      • You should say that you need to earn a lot more to have the same income, not “lifestyle”.

        I haven’t mowed a lawn since I was 17 (and got paid for it then), I have never changed my own oil, and while we do basic day to day cleaning we have a lady come every couple weeks to do the heavy lifting.

        Does this all cost more than if we did it all ourselves? Sure does! Is my “lifestyle” a lot better since I do thing I enjoy instead of things I hate like mowing the lawn, changing my oil or scrubbing the bathroom. Doesn’t cost us much more than maybe $125/month to save all that time and can now spend it doing productive work, quality time with my family or just something totally non-productive (rare) that I just actually like.

        Pretty good tradeoff in my mind for the vastly enhanced lifestyle.

        • That’s what life is all about, trade-offs. the time/money equation. I like to self manage, and do a lot of my own maintenance. Saving $1,000 per month is like having another rental property.

  5. Eric:
    Whether or not you use property management depends on your goals in real estate. Mine is to be able to scale up and spend my time in acquisition and money raising, not property management. I find it a better, more productive use of my time and resources not to manage. We currently have 218 units in 6 locations and are going to add another 60 units in 2 months. There is no way for me to do that if I self manage.

    • Thank you for the comment!

      With that many units, and that many locations, you probably need on-site management. And you probably actively manage the manager.

      By far, the majority of real estate owners who use Property managers, are small time operators, with less than 5 rentals. (no scientific evidence, just my thinking). Many are landlords in the same neighbor as they live. I know many personally. They are giving up quite a bit of cash for not much service.

  6. I manage two 11 unit apartment buildings myself but we are planning to move to Florida (from Minnesota!) in a few years. I would hate to hire a PM company to manage my properties. Is is possible (have others done it??) to manage my properties from another state? For example, could I hire a cleaning service and perhaps a maintenance man (who could show the vacant apartments)? I could screen tenants and set up service remotely. I could fly back a few times a year to check up or handle an emergency. Has anyone done this successfully?
    Thanks
    Jeff

    • I am in MN too. I have also been figuring out how to do that. I may snowbird it for a while, or take three weeks out of the month in a warm place, at least for December, January and February.

      Rent collections can be automatic. An on-site manager/care taker will probably work best. I know other investors that have done that. Screening remotely will work without a problem, assuming that you have a criteria that you use. Coming back periodically will be key to keeping a handle on everything.

      I am also considering selling into a 1031 exchange and buying farmland. Renting farmland has to be easier?

      • I am also in the twin cities of MN and have 15 properties that I self manage. I can see both side to the PM argument so I am not going to get into that. I wanted to comment on the farmland idea. I grew up on a farm in SW MN and still have many family in it so I find myself immersed in the numbers of farming, land values and rents quite regularly.

        You are certainly correct that renting farmland is quite a bit easier than renting houses. But as I am sure you can guess, with vastly easier comes vastly less profitable. In fact, farmland is so high priced right now compared to rents that if you are not buying with 100% cash you will lose money on the investment on a cash flow basis. Just to give some quick numbers farmland in southern MN is selling for about $8,000-$10,000 per acre right now (which is up about 5 fold in the last 15 years). Typical rents are around $300 per acre (which is up about 3 fold in the last 15 years). Land taxes are about $30 / acre and rising and you buy land to the middle of the road but can only rent tillable acres so you never get to rent every acre you buy but you do get to pay land taxes on each acre.

        The pure investment returns are 3% at best with 100% cash and negative with borrowed money. Farmland is also not depreciable which begs the question of whether a 1031 from rental properties to farmland is a valid like kind transfer.

        I don’t think you will find farmland investing all that appealing when you compare it to what you have right now. Easy usually equals low return. And that is certainly the case currently with farmland.

        • Thank you very much for the information! I am always considering any exit plans, and that was one. Of course, depending on tax laws, and all other investments, my plans could change.

  7. Jeff Brown

    I love DIYers, they’ve been a significant portion of what’s formed the foundation of my career. On the other hand, I’ve met a few guys like you, Eric, and they were beyond impressive in their ability to get things done, and well.

  8. I’m just starting. I’ve bought a property that I’m now renovating to rent. I don’t claim any large degree of personal expertise here But I do have an opinion based on my research. I’m going to pose my reaction to this article, and I’d like to get the author’s response.

    That reaction is this: Using management allow you to scale up your RE investment portfolio to point only limited by the capital you can raise, and the deals you can find. Conversely, if you self manage, you’re inherently limited to the number and location of the units you can handle. You’re stuck in your home market, which may not have the highest growth potential, and/or high costs of entry. Also, how may units can one owner self manage, even if they’re in his home market. If you want to reach a triple digit unit count, you’re likely not going to do it with self management.

    Yes, you give up a percentage of your gross margin to have management, but doing so gives you the ability to have a much greater gross profit. As far as the quality of the managers is concerned, Yes this is highly variable. I’m the president of a residential coop, so I’ve dealt with a number of property managers. They’ve varied from very good to criminally bad. Selecting and managing mangers is a skill that anyone who wants to be a large scale real estate investor is going to have to develop.

    • Thank you for the comment!

      You are correct. As you scale up, you need to make decisions on where the best use of your time will be. If you are long distance from your properties, you will need some help sooner. You manage your own property for the same reasons you do your own renovating. Because it is cost effective. Once you are a distance away, you cannot be there.

      You say you are renovating a unit for rent now. Are you hiring it all out? Doing it yourself saves precious capital for the next investment. Most people have more time than money. When you have more money than time, then you can look at hiring an employee, or a PM firm to help. You need to be in 100% control. Many people just turn the reins over to the PM, and hope for the best. That is a recipe for disaster.

      Giving away potential revenue, because at some point in the future you will rule the world, is foolish.

      • Mike Wolffs on

        I’m hiring contractors. I can do light home improvement work, but I’ve never done anything near a renovation, and this project will include renovating two kitchens and three baths, and building one new kitchen and three new baths. I want to get this done quickly and rented. There will also be code/permit issues. I think I need some professionals for this.

        When it ready, I’ll do the first round of rentals myself. At that point (renovated and rented), I may look to get a manager to take over day to day operation, if that pencils out.

      • It makes sense to hire out things if the opportunity costs are high.

        I just did a 4-unit, completely renovated. New kitchen cabinets, removed walls and put in center islands, install washer/dryers, new HW heaters, tile bathroom floors, laminate Kit/LR/DR floors, carpet BRs, paint, new screens, etc.

        I have a great place to buy RTA cabinets from. 100% wood, no particle board, and averages ~$100 per cabinet. Do a 15 cabinet kitchen for ~$1,500. I can send pictures of my kitchens if you want.

        I hired some guys that were from a small construction firm, and another guy to work with me when I was there. The daily progress could be seen, and adjustments made along the way. The entire project was 6 months long, but the first one was rented after only two months.

        Finish one unit first, and then start renting. Start revenue coming in as fast as you can, if possible.

        • Mike Wolffs on

          That’s part of the plan. Do the buildingwide work, then to the top floor unit, and work down, one by one.

          I also have a basement, and I’m trying to figure out how to eek another unit out of that. But I’m likely to have code issues.

          I’d be interested in the cabinets. Please email me the pictures. What metro are you in?

  9. Daaaaamn. Harsh. Just reminds me to call my PM on Monday to pay my respect for what they do for me and my family. Im happy to pay for reasonable maintence as I know im getting professional skilled labor and not some hack working my places. I 100% disagree with this post.

    • Thank you for the comment!

      You and I will have to agree to disagree on this one, but make sure you call your PM and congratulate him,. Not many people do.

      And be sure to make the call short, most PMs do not field many calls, they are out spending your money and spending time with their family too. Perhaps the calls are forwarded to their out of work brother in law, that is picking up some cash side gigs maintaining properties while collecting unemployment.

      I have had good jobs done by contractors, and bad ones. Do not count on getting skilled labor for rental maintenance with a PM. It’s definitely not union labor, or union scale.

  10. Mike McKinzie on

    Eric
    I agree with you 100%, there is no doubt you can save money managing your own property. It increases cash flow, raises your return percentage and lets you keep an eye on your investments. But, if I may, let me dissect each of your points.
    1. I NEVER pay a PM 10% or even 9%. My TX, OK and AZ PM’s charge me 7%. My CA PM charges me a flat $50 per unit, no matter what the rental amount is. My CO PM charges me 8%. So in your example, at $50 per unit, my costs is $600 a year, not $1,200. Fees are always negotiable.

    2. Every PM I use has nearly the same story. They tell me, “I could not find a good PM for my investments, so I started a PM to provide the kind of service I wanted.” They do not make money if the unit is empty, so they have the same motivation I do, TO MAKE MONEY. Your sentence, “Their motivation is to make the commission, not make you money,” is in error since they DO NOT make a commission UNLESS I make money.

    3. I have 7 PM’s and 6 do not charge any extra for filling a vacancy. The one that does charge extra has to pay a 50% Lease Commission through the MLS to the procuring agent as the rentals are listed in the MLS just like a sale. The nice thing there is my average vacancy time is less than 14 days and many times, I have two moving vans in the driveway, one leaving and one coming. Also, I have fired 5 PM’s in the past 6 years, 2 of them because they had their own ‘in house’ maintenance company and I ABHOR that. All of my PM’s use outside contractors/handymen/maintenance companies. And I require bids on anything over $250.00.

    4. I have never had a PM Guarantee so I don’t even know how to address that.

    5. Having rentals close to me is a JOKE. The cheapest house with 20 miles of me is $500,000 and the most that could rent for is $2,500 a month. If you are going to pay $500,000 for a house that rents for $2,500 a month, Real Estate Investing is not for you.

    6.Buy two (or three) hats. Hmmm, maybe I could find a maids outfit and clean my house. Then I could get some mechanic overalls and change my own oil. Next, I need to get a big straw hat and mow my own yard. Then I could buy a chef’s hat and fix my own meals. Then I could buy those denim pants that will show my crack when I bend down and fix the leak under my sink. (LOL) My point is that there are literally hundreds of things you can do yourself to save money, if saving money is your goal. If your goal in real estate investing is to create a job for yourself, it is a great way to do it.

    7. You state that you get 50-100 calls a year for 25 rentals. That is about right. My PM gets the same thing, but it also depends on the age of the unit. My newer units get 0-1 calls a year, anything over 30 years old will get 2-5 calls a year. On top of that, all of my units are visited twice a year to change out HVAC filters, detector batteries and to do a physical check up on the property. They care about the tenant and property as much as I do.

    8. Property Management can be simple and it can be extremely difficult. Most of the time, the tenant pays the rent. My PM collects $1,000 and I get $930 of it. The tenant pays online and the PM does a Direct Deposit into my bank account. If I die tomorrow, that process will continue. The tenant makes their repair request online and the appropriate action is taken. The PM makes $70 for most likely 1 minute of work. But I am not paying him to collect the rent, I am paying him/her to TAKE CARE OF MY PROPERTY in all aspects. There are those emergencies that take 2-3 hours of the PM’s time, and my cost is still $70.

    There is a lot more to the story that just saving money. I think the title of your article should have read, THE 8 REASONS WHY USING PROPERTY MANAGEMENT IS A WASTE OF MONEY because the truth is, using a PM gives me MORE TIME, it is not a waste of my time.

    I think the biggest advantage I have found in using a PM is that my vacancy periods are a lot smaller. A 30-60 day vacancy was common when I managed and now my vacancy period is averaging 14 days. Besides, what would I do if I had a vacancy in Texas, Oklahoma and Tennessee at the same time? My airline, hotel and food costs would be more than full time PM for all three!

    • Thank you for the comment! Great detailed post.

      1. Definitely fees are negotiable. But even 7% is a big hit to the cash flow. Since your properties are spread out, you have little choice.

      2. The PM only makes money when the unit is rented, but I have seen tenants brought in by PMs that should not be in the zoo, let alone a rental. Most PMs do not have the slightest clue how to screen a tenant. They do not even know the relationship that credit score has on tenant quality. Nor do they have a clue that price has on demand.

      3. I fill all my rentals via Craig’s, Postlets, and RentBits. I get plenty of calls.

      4. Most of the PMs I see have a free replacement guarantee. That is, no tenant placement fee if the first one doesn’t work out. If yours are not charging a placement fee, it would be moot.

      5. I live in a different neighborhood than you…

      6. I do change my own oil. And I have a small lawn service company. And I have a full-time 6-figure job. But I wear suspenders so I do not have the ‘crack’… As long as I am going to make $50 to $100 per hour, I would rather do it for myself.

      7. If they are actually going to the unit, that is great. Many PMs do not even do that.

      8. At some point, I am going to get more automated with my rent collection. Some are now, some are not. Most of my rent winds up in a rent box in the building. Some are PayPal, some BillPay, some a check in the mail.

      The titles are determined by BP, based on SEO scoring.

      My vacancies have been 1-day lately. The rental market is smoking hot. Sub-1% vacancy in my area. If you are in different area that your rental, you need help.
      .

  11. To answer your question, no, I’ve never regretted using a PM company before. Maybe I’m lucky, maybe I’m just good at interviewing and screening them, who knows? Tagging on to Jeff’s DIY comment, however, I was a tenant long before I was a landlord, and boy do I have some horror stories of renting from self-managing owners.

    One house, after living there for six months, the owner decided it was appropriate to move her daughter into the downstairs apartment, something that had never been discussed or disclosed before our moving in because there was no lease (DIY landlords tend to not use paperwork a lot either because they’re intimidated by it or don’t know where to find it). The problem – there was only one meter in the house, so all of her daughter’s utilities were showing up on our bill; and we had to share the washer and dryer, a coordination tug-of-war. On top of that, the daughter decided she could set the hours we were allowed to listen to our music or where we could park. It devolved into a nightmare, and we moved, after fighting with the owner to get our security deposit back.

    Another house, our garbage disposal broke. We called weekly for two months, first asking, then begging, to get it fixed, with no response. Finally, when we withheld our rent, she miraculously had a repair guy show up one evening, and after hours of sitting on the floor, he couldn’t fix it. Yeah, we gave notice at that property too.

    Moral of the story – if you do decide to self-manage, you better make sure you know what you’re doing and have the necessary skill set, because that 7-10% a month you are saving by not paying a PM could cost you a lot more through your own inadequate management.

    • Thank you for the comment!

      Absolutely true. There are many landlords that should be in jail, not managing properties. I do a lot of preventative maintenance between tenants. I have written about this on my own blog.

      And I fix things at the appropriate timing. My tenants see me working around the building, and they know I am on top of things too.

      And I always remove my garbage disposers between tenants. They are a problem waiting to happen. Too many times have I seen brillo pads, aquarium gravel, etc. stop them.

      Once you have good tenants, all is easy. For you or the PM. When a PM gets in a bad tenant, that’s where you wind up with difficulties.

  12. Regret having a tenant be the manager, who sent phony bills for expenses. One bill had phone of a school, got caught, end of story.

    • Thank you for the comment!

      You can get all sorts of dishonest people, in any occupation. Do you think PMs who are a Realtor are any more honest than the general population? At least with a tenant, you can do a background check.

  13. Cory Binsfield on

    I’m self managed and have been that way since I purchased my first property back in 1998. After I discovered how easy it was, I decided to scale my portfolio without a property manager. Currently, I’m managing 97 units and have basically created my own management company. All the local companies in my town charge 8-10% plus $25 to $35/hr for simple maintenance calls. Frankly, every time I consider handing over my portfolio, I run the numbers and realized it would cost me $5,600/mo in management fees, $1,800/mo in leasing fees (assuming 1/3 turnover and average lease fee of $700) plus markups on repairs and maintenance of approximately $1,000/ mo. All in, I’m saving $8,400/mo or $100,800 per year.

    Here’s how I mange to keep my sanity without doing everything myself.

    1) I’m a bonehead with maintenance and hire it all out. Just like the property manager.
    2) I have some awesome tradesman that work part-time on weekends that handle renovations.
    3) My primary maintenance guy works 30 hours per week and handles almost everything. Frankly, he’s the fastest painter I have ever met and I’ve nicknamed him “Speed Painter.” He’s the first speed painter I’ve used that doesn’t splatter paint and can cut trim and ceilings like the pros.
    4) I’m a huge fan of technology. My property management software allows my tenants to pay rent online, track everything and best of all, makes running my business a breeze.
    5) BEST OF ALL……..I’m classified as a real estate professional for tax purposes and get to write off tons of depreciation against my earned income from my full time job as an investment advisor. The tax savings alone is worth the hassle of texting a tenant each day for a service issue then texting my main tenant guy or electrician or plumber to get it fixed.

    Right now, I’m looking to expand into multi-family in another state. When that happens, I will definitely hire a professional property manager. For now, all my units are within 20 minutes of my house and I enjoy the savings.

    Great topic Eric!

    • Thank you for the comment!

      When you are close enough to manage properties, it makes sense. I would be giving up ~$21,000 to hire out my management. By doing maintenance myself, I save even more. And I have learned how to manage it, so if I ever did hire a manager, I could manage it closer.

      At some point, I will leave my real job and do this part-time; it’s only 20 – 40 hours a month, including cleaning, showing, maintenance, apartment turns, etc.

      And I think I would give your painter guy a run for his money in a painting competition…

    • Mike mckinzie on

      If all my units were within one hour of me, I would manage them too! But I would have a back up system so I could travel.

  14. We stopped using a property management company after seeing many tenants receive their damage deposit back IN FULL that never should lhave happened—-when I went into one house to view the condition I thought the PM’s all were BLIND–one shower was so filthy my cleaner had to use a putty knife to scrape the floor of the shower it was so filthy–the property manager responded, “oh I guess you look at things more closely than I do “. We found they would rent to any applicant who a pulse and a job & was not in jail. And if something is wrong, they would call & say, “looks like you lneed a new roof, or furnace ” and then add their commission for dialing the phone. NOT ltheir money going out for needless or bad repairs, it is
    YOURS. By the way, the roof that the PM said we needed was twenty years ago, and it is still
    there- and we did NOT need a new roof, just a cleaning and moss repellant — It has been my experience in the last 20 years of managing our houses that when a repair person or contractor hears the word rental and property manager, they hear a cash register going off. It also has benefitted me enormously to MEET the repair people at my rentals–I see how they work, if I can trust them, and can address issues of replacement vs repair– it also establishes a personal relationship with the repair people & then it is easier to get someone in an emergency situation — it also gets you into your rentals ( to check the repair work )& you can see how your tenants are keeping up your property–I let them know I will be stopping by to
    “check the work”, and then instead of sending a Notice to Inspect , which tenants resent & hate– I get inside under the premise of seeing what is being done repair wise.
    Hands on has been best for us–PM’s generally speaking are just people on commission.
    checking work .- .

    • Thank you for the comment!

      Tenant screening is an inherent weakness for many PMs. They price too high, and take any tenant who applies. They do not know what an ‘average’ tenant looks like on paper, so they think all tenants are deadbeats.

      I saw one property manager just take a bad tenant from one client that he was managing, and move them to another client’s vacant unit. The first investor is happy; he gets rid of a tenant that wasn’t paying rent. The second investor was happy, he got a tenant fast.

      Unfortunately, the tenant never did pay any rent in the new place, and was evicted.

  15. Your bring about some good points as to the benefits of managing your own properties. In my experience, it really is dependent on your own comfort level. For some investors, their portfolio is so big that it makes sense to hire someone else to help manage their properties. Sometimes this means outsourcing, but I prefer to hire someone directly as a staff member. This way I am not nickle and dimed for every lightbulb.

    • Exactly. My properties are close to my home, most within 3 miles. Once you get to a certain size, you can hire an employee.

      At a minimum, if you manage your own properties, and later decide to hire a PM, you know how to manage the manager.

  16. You and Ali Boone should do a debate format as it sounds like you wrote on opposite ends of the spectrum. I manage all of my own for now.

    • Thank you for the comment!

      I think you increase your cash flow exponentially by doing it yourself. If you have an apartment complex, or rentals far away, you probably need help.

      But I see many people, with their rentals only a few minutes away, hiring a property manager. And they scramble to make money at a different job, making less that the property manager who they could replace.

      It makes no sense.

  17. Larry Brown on

    I appreciate your article and self-manage my properties as well. You stress the value of excellent tenant screening and I believe I am getting better at it but would like to know what your tenant screening criteria are. Thanks for your article.

    • Thank you for the comment!

      I have a lot of criteria listed on my own blog, and many of the reasons for my criteria. Feel free to contact me there, but here is a general idea of what I look for.
      625+ credit score
      $45K in household income. That’s ~4x the rent in income.
      No criminal or eviction history.

  18. HI Eric, great post. For your needs goals and aspirations, it completely makes sense, especially when you buy properties less than 1 hour from where you live.

    I am an out of state land lord, and it feels like I am pulling teeth from my Property manager and I seem to constantly have more expenses than I feel like I should if I managed it on my own… go figure!

    • Thank you for the comment!

      That is another downside. A PM should be getting approval for larger expenses, but they can certainly nickle and dime you to death.

      There will be deals closer to home, if you look. There are foreclosures everywhere.

  19. Eric,

    I am surprised you did not get the backlash I expected from your post. While I agree with most of your points, I think one critical factor has not been given enough weight; time. I can always make more money, I can never get the time back from directly managing my units.

    I have properties in 4 states and 6 cities. My closest property is less than 5 streets north and my furthest halfway across the country. My Colorado (where I live) properties have cost me $20,000 in management fees over the last four years. After lease up and added maintenance overlay they add up to around 12%. I also know my maintenance and turnover have been higher. Its been a significant cost.

    My experience nearly reflects your post, yet I still prefer having a PM. I’ll gladly pay 5k a year and have lower returns to spend that time with my family. My limited free time is far to precious and its time I can never get back. My son will never be 2 again and my daughter will never be an 8 month old again. Yes, I have made a choice for lower returns, but the cost of better yields is far higher than I wish to pay. I would have a manager even if I lived in the same building.

    Jason

  20. Thank you for the comment!

    When you have property a distance from your residence, it is more difficult. Handling calls is not hard, but filling and turning units is. That is where you likely need help.

    Time is a valuable commodity. That is something you have to consider. What many ‘investors’ do, is hire out the stuff that costs $60-$100 per hour, and continue working at tasks that are only bringing in $20 or less per hour. That is a poor use of time.

    If someone is only making $100K per year, that is ~$50 per hour. If you are flipping, or selling RE, and not making $100K (which most people do not), then give up a few hours of that work to work on higher profitability items, like property management of the close rentals.

    You can even get your kids involved when they get old enough. I know one landlord that is teaching his kids (12 years old) how to determine profits based on revenue and expenses. He even has them do some smaller tasks, like supervised cleaning and light maintenance. Anything to get them into the entrepreneur mentality is a great family experience.

    The best thing to invest in, if you want to be a 100% passive RE investor, is a REIT. Put your money in and forget it. There’s less risk because of the diversification of the REIT itself, but you are still in RE.

    • Eric,

      I appreciate your reply. I suppose like many things in life there is the grey area in between. Its the decision of highest return but most time by managing my own properties or lowest return and time by going through a REIT. I think I fall in between by having a PM. My ROI still exceeds 20% which is far better than I feel I can do anywhere else, but is not as high as you likely achieve. My bonus is spending less than 4 hours a month dealing with my properties.

      Jason

    • Hi Eric,

      Good article, but I will have to disagree as well – especially with the title. Decent Property Management should ‘at the minimum’ – SAVE YOU TIME – if anything. It might be a waste of money, but not a waste of TIME. :-)

      I’ve heard all of the horror stories about crooked PM’s, so I can understand the negative conotations about PM’s, but I happen to partner and do business with a highly reputable and upstanding PM company – so I’m mainly seeing the good parts of the biz. So maybe I’m biased.

      But overall, I’m a believer in property management because of what we want real estate to ultimately do for us which is give us PASSIVE INCOME. If PM handles our rental properties – it can truely be passive. If we are doing it ourselves – we will alway have a job.

      Sounds like you enjoy the day to day duties of being a landlord, doing maintenance, and handy work. That’s great. I’m just not interested in those things. When you think of the $/hour analogy – I do think I’m worth $100-200/hr – doing deals or furthering the business. I think PM work is worth $10-$15/hr – so I outsource it. I try to outsource my household duties too, but my wife gives me a guilt trip (since she enjoys a lot of it). :-)

      So yes – of course you will save some money doing it yourself – but I’d rather have the time – since that is our most precious commodity.

      Thanks,

      Matt

      • Thank you for the comment!

        The title wasn’t mine, BP creates the title so it hits better SEO results. It was originally titled “The Landlords Nightmare: Property Managers” to take off on another post here.

        There are some great PMs out there, but you need to be able to manage them. And understand what they are doing, so you know it’s gets done right. If not, you can lose money as the PM gets their education. Bringing in bad tenants can kill your profitability, and the PM typically doesn’t have a clue how to screen tenants. It costs a lot more than $15 an hour for a PM.

        I don’t mind the work, I figure I have to do something, and laying in a hammock all day is not something I can do for too many days at a time. I save time buy not mowing my yards except for every few weeks. It gets a it shaggy, but that’s OK by me.

  21. Return On Investment is enhanced by self-managing. In your example, it is a 60% gain in cash flow.

    Return On Time is enhanced by using professional management. This can provide an infinite return! That’s far better than 60% via intrusive-to-life DIYing.

    ROT is an incredibly crucial metric. But maybe it is rarely used because it sounds like “rot”. :)

    That is why I use a professional property manager for all of my units, 20 units of which are within 30 minutes of my home.

    One of my biggest mistakes in real estate investing? It was self-managing for the first five years. I would have learned all that I needed to know in a year or two.

    Life is made up of time. Time is all that we’ve got.

    Does one really want to spend more of their life scheduling contractors, bugging tenants for late rent, simply knowing that one could get a phone call at any time, fixing leaky faucets, doing walk-throughs to look for drywall holes, and changing toilet flappers? We all know that it can be worse.

    Your Return On Time can get pummelled.

    Passivity is one of real estate’s great benefits. Self-management ignores much of this.

    I hope that this does not touch a nerve; that’s not my intent. I ask this in a respectful, do-as-you-will sort of way:

    Has an abundance mentality vs. scarcity mentality schism surfaced here? I even notice that the article mentions Wal-Mart when making a retail reference, and essentially advocates losing irreplaceable time to save money by self-managing.

    Many RE investors are already “trading time for dollars” at a j-o-b.

    Now the first manager that I used was a bad one. Then I found a good one. I recommend self-managing only a year or two. That way, you will know how to identify a good one.

    Since hiring a PM, here’s just a sampling of what I’ve had the time for:

    -Find the best wife
    -Take surf lessons in Lahaina, Maui
    -Touch orange lava with a stick at Kilauea Volcano
    -Climb to the highest point of many US states
    -Climb to the top of Mount Pinatubo in the Philippines
    -Find two very worthy charities to donate to
    -Visit eighteen US national parks
    -Visit my grandmother and parents on the other side of the US more often
    -Get to watch my out-of-state niece grow up and be involved in her life
    -Boat Thailand’s Mekong River
    -Vacation in Central America and Asia
    -Hike the breathtaking Kalalau Trail on Kauai’s Napali Coast with my wife
    -Become physically fit and become competitive in various races
    -Even learn to optimize leverage ratio and use 1031 Exchanges to increase ROI passively

    Not at any time did I have to be concerned with managing properties. I had total Peace Of Mind.

    One might think that they have a good life even while managing their own properties. And they might.

    But ask yourself: Could it be better?

    What is the opportunity cost here?

    Real estate is great. But it’s not “the thing”. Real estate fuels “the thing”.

    You have one life to live. Do you want to live well? Or not?

    • Thank you for the comment!

      You sound like you have had an adventurous life! I plan on doing some of those things, as soon as I leave my ‘real’ job. Since I am “trading time for dollars” at a j-o-b, at this point in my life, I am salvaging as many dollars as I can so that I can be more in a retirement mode.

      “I recommend self-managing only a year or two. That way, you will know how to identify a good one.” => This is an excellent quote, but if you are still trading time for dollars, why not continue until you can be financially independent?

      I do not have kids, so the kids’ part of the equation is out. I am planning on doing some RV adventures in the next few years, and visit many of the national parks. I think I have already been to 18 parks, but I am not sure.

      So, I appreciate the advice and wish you all the best.

  22. Certainly there are a lot of considerations in deciding whether to self-manage or not and $ is just one of them. I successfully self-managed 18 homes, all within 30 minutes while working full time. These were new or like-new homes/duplexes that required almost no maintenance, just show and sign.

    We also have an on-site manager that I hired and oversee that lives in a 42 unit building. I absolutely need resident oversight at this location. It costs me about 5%. It’s a good 30 minutes away in an historic building that requires plenty of maintenance. I would have time for nothing else if I tried to manage it myself.

    We have another 24 unit complex that we had hired management for. The cost here was only 4% but the real cost was in the constant 8-16% vacancy! When I left my full-time job I needed the income so we let her go. My direct attention led to 18 months of 0-vacancy!

    So, I conclude that your abilities, interests, availability and the nature and location of your property all need to be considered in deciding whether or not to self manage.

    • Thank you for the comment!

      You are correct; the cost of the PM is only one thing of many to consider. But it is a major thing. And you have also proven many of my points. Get great tenants, maintained units, and they are not difficult to manage. Property management is easy; it is tenant management that is the difficult part. With larger units, they are required as you have far too many showings and maintenance to do it yourself as a part-timer.

      I see far too many people thinking they are inexperienced; hire a PM to do their management for them. All too often, the PM doesn’t have any more experience than they do or worse yet, doesn’t understand the basics of tenant screening and tenant management. It’s one thing to know you are inexperienced, another to think you are experienced and really are not.

      Far too often, a PM brings in the first tenant that applies, and disaster happens, they do not have a clue about what to screen for, let alone how to do it. Far too often, PMs have never even owned rental property.

  23. Dawn Anastasi on

    Nice article and lots of great comments!

    I also self-manage. I do the due diligence up front to make sure I get good tenants that don’t have to be evicted. Also rehab the properties well and keep them maintained so you get less calls later.

    I used to be more hands-on with maintenance and rehab but due to medical issues I’ve had to hire more things out. I wish I could do more.

    • Thank you for the comment!

      If you have the time, self-managing is great. You get to know the process, and you get to learn “on the job”. At least when you make a mistake, it is your own. When a PM is learning on the job, it’s is on your dime for both the education and the clean-up.

      When you have too many things to do, and not enough time, you need to sub-contract out the lower priced items. Property management is a higher priced item, but it does come with some timing issues. Doping it yourself has a lot of advantages, and you can save a bunch of money too. You can pick when you want to mow the grass, you cannot pick when a tenant will call.

      Tenant quality is something that everyone knows about, but few can recognize a great tenant on paper. Fewer still know what an average tenant’s credit scores are, or what tenants they are capable of attracting. And some PMs, do not even know how to screen tenants, which is a basic item.

      In life, you have to have some activities, and managing your own property can be both rewarding and very profitable in more ways than one.

  24. One thing you, and a few commenters, have said is self managing increases your investment returns. That is not really true. It does increase cash flow but that is because you are not explicitly paying for management, it isn’t like you don’t have management.

    If you go to sell you portfolio nobody will pay for that extra “return” based on not paying for management. Imagine the conversation with the buyer.

    Mr. Passive Investor: I don’t see anything for management here on your financials.
    You: That is because I manage all the units myself.
    Mr. Passive Investor: Are you going to manage them for free if I buy them?
    You: NO!
    Mr. Passive Investor: Okay well I will have to add 10% of the gross rent onto the expenses as well as a one month lease fee per year per unit to account for that.

    Not taking a stance on if one should or shouldn’t manage their own units, however I do believe that they should be purchased so they can carry management and you should be paid for the JOB you choose to do.

    • Very true. Management fees are always included in an investment property calculation. I like to self manage, as I can save quite a bit of money, and I have to do something with my time anyway.

      Since most investors are small time, and have only a few properties that are close to their main home, I advise to self manage. It’s not difficult, great money, and a great learning experience.

    • I think whether management fees would be included in a sale calculation depend on whether the property in question is more oriented to self or professional management. If we’re talking a 25 unit complex, obviously management is going to be expected. In 1-3 unit properties would it? I wouldn’t think so much. These are the types of properties bought by people who are looking to self manage.

      • Without a doubt you will have many more people looking to self manage small residential properties, especially their first few units.

        However if you are selling to someone looking at it that way and will pay you the same as the one factoring management then you found someone willing to pay you a premium to do more work.

        I’m of the opinion you should always evaluate a deal assuming management even if you fully intend on doing it yourself forever.
        a) It is a job, get paid for it
        b) You might get sick or hurt and can’t do it anymore
        c) You might move out of the area. Not impossible to manage from a distance but it is a lot harder so have options
        d) You might end up really sucking at it
        e) You might be good at it but just get sick of doing it

        If you NEED to manage a place to make it work that is not a great situation to be in.

  25. This article seems to lack a total cost of ownership evaluation. It is very clear that self management will always save money, and hence increase your returns. But the amount of rent you can collect is also an important factor.

    In my own area, I can never find a rental for more than $0.75/sqft/month. A 1200 sqft unit in the most ideal situation doesn’t yield more than $900/month. This is the number I discovered on my own, and confirmed with my in-laws that have lived in the same area for a long time and own 20+ units. You can’t fight that number; you must simply accept it.

    Enter the fact that all real estate is local, what can I expect if I go somewhere else, like Texas? Turns out, I can get $1/sqft/month. A 1200 sqft unit rents for about $1200/month. (Okay, I bought 1300 sqft units that rent for $1350, but let’s round that down to $1/sqft/month).

    So take my original $0.75/sqft/month, multiply by 1.33 (33% bonus for moving to TX) then multiply by 0.9 (-10% for PM fees), and I get => 1.2, i.e. 20% higher monthly rent remotely than if I managed it myself locally. Side effect is that I can focus on my career as a software developer AND take my family to Florida 4-5 times per year.

    The kicker? The costs of units were about the same, ~$100/sqft. The real lesson in that is that by buying in the right location, the macroeconomics of “location, location, location” trumped the costs of a PM.

    Naturally, this is different in ALL circumstances, because we all live on different places, and shop for real estate elsewhere. So before you cheer or complain about value of PMs, do the macro analysis first and compare gross rents between your local area and certain other locations.

    • Thank you for the comment!

      All too often I see ‘investors’ buying property, and having it managed, only to get 5% cash on cash returns. You can buy a REIT, or even a high paying dividend stock, and nearly get that return. And less risk and immediate liquidity.

      When you have a property manager, you should get an even better ROI than you can locally , by yourself. Your management should add to the ROI, not be a substitute for it.

      You lose control with a PM, and by definition, generally loose some profitability and efficiency. I also see investors, who know nothing about RE, attempt the out of area investing.

      If you do not know what you are doing, how do you know your PM knows what they are doing?

  26. We own 9 rental properties managed by a real estate property manager. We do all the repairs. What I want to do is create a LLC to manage and rent the properties and pass the payment to us monthly just like the present company does. If we create the LLC to be the property manager and collect rent would we then have to pay social security tax? We don’t pay SS tax now on the rent and other payments.
    Or we could use the LLC to just rent the property and have all rent or other payments made directly to use instead of the LLC. This way the LLC would never have any income.
    Any thoughts on this is appreciated.

    • Just create a LLC with a real estate main purpose. You can charge just what you are spending in expenses, for a $0 return on the LLC. All my rentals are owed by separate LLCs, and I just pass the RE income through, without and Self Employment tax.

      What you really want is a company that does business with the tenants to protect yourself. There should not be any FICA or SE tax required. Check with an account just to be sure.

      • Thanks for the help.

        IF I am the property manager do I still have to list in the lease the owners names?
        My present property manager company have us listed in lease as owners and we have to sign the lease. The property manager also is listed in the lease and has to sign the lease.

        None of our 9 rentals would be in a LLC and will not be in the property manager LLC we are creating as they are all financed through Fannie Mae.

        Also can I have the tenants make payments directly to me as owner. This way the LLC will never have any money as my agreement with my own LLC would state they would just act as the go between between the tenant and me to rent the properties. We would still file a schedule C tax return ans show no money.

      • You can use the PM as the lease signer, you do not need to sign the lease. Assuming the PM is a licensed RE agent, and you have a written contract with them.

        The tenants should pay who they have the lease with. If they sign the lease with the PM, they should send a check to them.

        Of course, anything can be negotiated.

        • I will be the property manager of the new LLC and am also the owner. From what I have been able to find out, here in Virginia a property manager does not have to be a licensed RE agent.

          Do you have any thoughts why the present property manager who is a RE agent require my wife and I names on the lease and we also have to sign the lease.

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